Option Investor

Daily Newsletter, Wednesday, 7/26/2017

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Strong Earnings Powers Market Higher

by Keene Little

Click here to email Keene Little
This month's rally has been in anticipation of stronger earnings announcements and the market has not been disappointed. As long as the announcements remain positive we could see the market continue higher. But things are getting a bit frothy and there are reasons for concern.

Today's Market Stats

Today's relatively strong rally in the Dow was brought to us courtesy of Boeing's (BA) nearly +10% rally. AT&T (T) also received a positive response, up +5%, to its earnings report and the two companies easily compensated for some weaker stocks in the Dow 30. The banks struggled again, which kept the S&P 500 flat for the day, while techs continued to march higher. A good chunk of the RUT's strong rally on Tuesday was given back today and its chart is telling us there's a reason for bulls to be a little concerned about any further rally potential.

Earnings announcements have driven the stock market higher with upside surprises, or at least without significant downside surprises. It's a busy week for companies' announcements and the expectation is for continued good news. Not that it currently matters to most market participants, but earnings aren't actually as good as they seem on the surface. The surface results sound fantastic though - since 2009 earnings for U.S. companies have increased +265%.

SPX is up about +271% since its low in March 2009, so that's pretty good correlation with the growth in earnings. But the trouble with earnings is that the growth has been mainly accomplished through the use of smoke and mirrors. Sales for these same companies have increased only +32%. Either companies have been extremely efficient in cutting costs (since prices haven't increased much) or else they've done some financial engineering to accomplish earnings growth that is nearly 9 times sales growth.

The smoke and mirrors is of course stock buybacks, which reduces the number of shares outstanding and that in turn drives EPS higher, even if in fact earnings did not improve. With the use of nearly zero-cost borrowing companies have been the primary driver behind the buying of their own stock and hence higher prices. One could argue whether or not it's smart for companies to be paying top dollar for their stock right now.

Unfortunately the borrowed money has not been put to productive use, such as capital investments, but instead only to buy their own stock as a way of "improving" their earnings announcements (which of course helps executive pay compensation from their stock grants/options). When that buying stops we have to wonder who will be available to buy the stock in place of the companies' purchases. I know, the Fed will step in and start buying (wink).

For now the stock market likes the new and improved earnings announcements and this month's rally has been in anticipation of good earnings. Comparing results to Q2 2016 is an easy comparison but comparing the coming quarter to Q3 2016 is not going to be nearly as rosy. Therefore this quarter's earnings run (remember those in the dot.com era?) could see at least a temporary peak in the bull run.

There were no surprises from the FOMC announcement this afternoon. The rates stayed the same and the Fed is promising (threatening?) to start reducing its balance sheet soon. With the Fed's worry that inflation is not ticking higher it is hinting that rate hikes could be slowed down from what they had previously discussed. The result following the announcement was a small pop up from this afternoon's pullback in the stock market, another spike down in the US dollar, a spike up in gold and a spike down in Treasury yields, all of which was a reaction to the possibility that the Fed will have to stand still on further rate hikes.

The Dow was relatively strong today and it made yet another new all-time high. As mentioned above, its rally was primarily due to the positive earnings reaction in Boeing (BA, +9.9%) and AT&T (T, +5.0%). BA is very bullish with its gap up and higher run to new all-time highs whereas T looks like short covering following an oversold decline from February. BA's 21-point rally added more than 140 points to the Dow, which more than accounted for the Dow's 97-point rally today.

BA has had a nice run up from January 2016 where it has more than doubled its price from a low at 102 to today's high at 234. Interestingly, and what is a common theme in the indexes, it's possible today's positive reaction will be the icing on the cake for its rally from 2009. Looking at the chart of BA shows a clean 5-wave move up from March 2009 and while it could stair-step a little higher, the wave count is suggesting caution about expectations for further upside. McDonald (MCD) had a similar bullish gap up yesterday but gave up about half of it today.

Boeing Company, BA, Monthly chart

The monthly chart of BA, shown below, is using the log price scale but if you view it with the arithmetic price scale you'll see the rally from February 2016 has gone bullistic (purposely misspelled) and a parabolic climb usually doesn't end well. It's particularly vulnerable here as it tests its trend line along the highs from April 2010 - February 2015 (waves 1 and 3, which is often where the 5th wave terminates), so far with a slight poke above the line near 231. A small throw-over followed by a close back below the line would create a sell signal so the bulls need to keep the rally going on Thursday.

With its 30 components the Dow can be easily swung up and down by one or two good or bad companies and a lot of people don't like following the Dow because of this. But it's still the number one reported index that people hear about and it's a good indicator of sentiment. Starting off with its weekly chart there are some warning signs dead ahead.

I could easily argue for higher prices and in fact I think there's a good chance for higher prices on Thursday. But I also see a strong possibility that only minor new highs, if any, could complete the big rally from January/February 2016. I think it's a risky time to be chasing the market higher.

Dow Industrials, INDU, Weekly chart

The Dow is getting pinched between its uptrend line from November 2016, which has been supporting all minor pullbacks since May, currently near 21515, and its trend line along the highs from May 2011 - March 2015, near today's close at 21711. The significant bearish divergence against its March 1st high suggests it's not a good time to bet on a bullish breakout. It could happen and a rally that stays above 21800 would be a bullish move.

Dow Industrials, INDU, Daily chart

The Dow has been chopping its way higher since the June 29th low, which is normally an indication it's in an ending pattern. That interpretation if further supported by the waning momentum (bearish divergence). I mentioned above that the Dow would be more bullish above 21800 but perhaps not for much more. There's a price projection at 21888 (where the 5th wave of the rally from April would equal the 1st wave) and that projection crosses the trend line across the highs of the rally from April on the 1st of August.

The Dow would therefore be more bullish above 21900 and as long as the bulls can keep the Dow above Monday's low at 21496 it stays bullish. Just be aware that the form of the wave pattern can be considered complete at any time, including right here.

Key Levels for DOW:
- More bullish above 21,900
- bearish below 21,496

Dow Industrials, INDU, 60-min chart

This morning's quick high for the Dow was a test of a trend line along the highs from June 20 - July 14 (gray line on the 60-min chart below), as well as the trend line along the highs from May 2011 - March 2015 (purple line), which is one of the reasons why I say the rally could be considered complete here. There's also a 5-wave move up from June 29th in a rising wedge (ending diagonal) to complete the 5th wave of the rally from April. However, it would look "prettier" with a pop up to the top of the rising wedge identified as the trend line along the highs from July 3-14, near 21830 by the end of the week.

S&P 500, SPX, Daily chart

A little different wave count for SPX has me looking for the completion of the leg up from June 29th, like for the Dow, to complete the larger rally pattern. Two equal legs up from May 18th points to 2506.80, which crosses a trend line along the highs for the rally from March (April 26 - June 19) on August 7th. That trend line is currently near 2494 so depending on how quickly SPX rallies up to the line (assuming it will) we could see a top at roughly 2594-2507. The first sign of trouble for the bulls would be a drop below last Friday's low at 2465.

Key Levels for SPX:
- more bullish above 2507
- bearish below 2435

S&P 500, SPX, 60-min chart

Today's consolidation following the morning high has it looking like we should get another leg higher. Another small rally would then do a good job completing a 5-wave move up from last Friday and I have projections for it near 2485 and then 2498. The short-term pattern suggests SPX might have trouble making it much above 2485. A drop below last Friday's low at 2465 would suggest a high is in place.

Volatility index, VIX, Weekly chart

If nothing else it's at least entertaining to see how low the VIX is going to go before bottoming. The weekly chart below shows this week's poke below the bottom of its 2-year bullish descending wedge (with bullish divergence) and the bounce back up inside the wedge. Normally this creates a buy signal (for the VIX) so we'll soon find out if this week's low (8.84 this morning) will be the final one. A rallying VIX doesn't mean the stock market has to reverse back down but a rising VIX with a rising stock market would be a warning sign.

In addition to the uber-low VIX we have the CNN Fear & Greed index hitting Extreme Greed (79 today, 81 yesterday). The COT report shows dumb money sitting in a historically large net short position, meaning they're expecting even lower VIX. Hmm, a very low VIX with a large net short position by dumb money and a bullish sentiment extreme -- what could possibly go wrong? Long vol seems like a good play here.

CNN Fear & Greed index, chart courtesy money.cnn.com/data/fear-and-greed/

Nasdaq-100, NDX, Daily chart

Like the other indexes I see the potential for techs to push a little higher. NDX could make it up to its trend line along the highs from November 2014 - July 2015, which will be near 6015 by the end of the month. But I'm seeing waning momentum on the short-term charts and oscillators threatening to roll over on the daily chart. The wave count can be considered complete at any time and it's a big reason I'm suggesting not chasing this higher. Pull stops up tighter if in long positions since the coming correction could be a doozy.

Key Levels for NDX:
- more bullish above 6020
- bearish below 5725

Russell-2000, RUT, Daily chart

Following last Friday morning's spike above the trend line along the highs from 2007-2015, the RUT immediately dropped back below the line. On Tuesday the RUT had a strong rally and made it back up to Friday's high (practically to the penny). Today's high at 1452.02 was to the penny. I thought Friday's spike high was a fat-finger trade since IWM did not do the same thing and it's amazing how many times a fat-finger trade is followed by a test.

With two failures to hold above the long-term trend line (which fits as the top of a large megaphone topping pattern) it becomes riskier to hold long positions here. A sustained rally above 1462 (a short-term price projections I have for the current move) would be more bullish but at the moment it's looking like a setup for a reversal back down.

Key Levels for RUT:
- more bullish above 1462
- bearish below 1415

S&P Midcap 400 index, MID, Daily chart

Occasionally I show a chart of MID because it's an index that shows nice form. Perhaps because it's not as easily manipulated as the other indexes but whatever the reason, it has been showing a nice setup for an ending pattern, which might have been triggered today.

The choppy rally from March formed a shallow rising wedge (ending diagonal 5th wave) and following the July 6th low I thought we'd see one more leg up to the top of the wedge, which occurred on Tuesday. Today's decline follows yesterday's little throw-over (a classic finish to the pattern) and creates a sell signal. The only way to negate the sell signal is a rally above yesterday's high at 1795. Confirmation of a top would be a drop below the bottom of the wedge, currently near its 50-dma at 1747.

A short-term rising wedge, for the final leg up from July 6th, was broken today as well and that helps confirm a top is likely in place. The broader averages could continue to rally a little more but this index has "SELL!" written all over it. We should see a fast retracement down to the May low near 1683 (and its 200-dma) before getting a decent bounce correction and then another leg down.

Transportation Index, TRAN, Daily chart

The TRAN has been acting weaker than the Dow since its high on July 14th. Last week the TRAN dropped back below its highs since last December and left behind a failed break-out attempt. The Dow's new highs since July 14th has not been confirmed by the TRAN and Dow Theory says that could be a problem (all the pundits were all over the Dow Theory buy signal when the Dow and TRAN made new highs together in early July but they've been strangely quiet since the TRAN's reversal).

The little bounce off last Friday's low has so far only resulted in a back-test of price-level S/R near 9490. A drop below the 50-dma, currently near 9378, and the November 2014 high at 9310 would be further confirmation that a high is in place for the TRAN. The bulls really need the TRAN to pick itself up and at least get back above its broken 20-dma near 9591.

U.S. Dollar contract, DX, Daily chart

The poor dollar has fallen and can't get up. It's been nearly a non-stop decline this month and once it broke below the bottom of a parallel down-channel for the decline from January, near 94.75 last Tuesday, it's making a bee line for possible support near 93.

The bottom of a down-channel for the leg down from May is currently near 92.90 so the dollar would clearly be more bearish with a sustained break of support near 93. In that case the next support level is near 90 (a trend line along the lower lows since early 2015). The dollar is due at least a bounce off support but at this point it's looking like we should expect lower lows after a bounce correction.

Gold continuous contract, GC, Daily chart

The only thing surprising about gold is how little it has rallied while the dollar gets punished. It did rally today while the dollar declined and that has gold testing its 62% retracement of its June 6 - July 10 decline, at 1262.59 (today's high was 1263.40).

A little higher is the broken uptrend line from December 2016 - May 2017, currently nearing 1270. It's possible gold is starting another rally leg but that wouldn't become more apparent until it's able to break its downtrend line from September 2011 - July 2016, which stopped the rally into the June 6th high and is currently near 1284.

Oil continuous contract, CL, Daily chart

Oil spiked up yesterday and then added a little more today. The result is that oil now has achieved two equal legs up from its June 21st low, at 48.92 (today's high was 5 cents shy of that projection). A little higher is its 200-dma and downtrend line from April-May, both near 49.40. If oil makes it above 50 it would look more bullish but at the moment it looks like a bounce correction that will lead to a continuation lower.

Economic reports

Thursday's economic reports are not likely to be market moving unless the Durable Goods report comes in much weaker than expected. It's expected to improve from May's -1.1% to +2.9% in June.


The bull market continues and the uptrend is still intact. There are cracks showing in the foundation and some indexes are flashing strong warning signs (such as MID) but there is no proof that the market is topping. I see evidence that suggests a top could be forming here or in the next day or two but obviously that's speculation and an attempt to see through the snow in my crystal ball (I need to learn to stop shaking it first).

The stock market is rallying in anticipation of good corporate earnings reports and so far the market has not been disappointed. What happens after the earnings, especially with a more difficult comparison with Q3 2016, is anyone's guess but it could prove challenging for the bulls to attract more buyers. The stock market is after all a "greater fools" market that's always in search of people willing to buy it for a higher price than the person before them.

We have a very low VIX and very high bullish sentiment. Stability breeds instability (waiting for a Minsky moment). Wave patterns suggest the market is topping, either here or in just days if not hours. But don't try to catch rising knives since we could be in a bona fide melt-up phase where the Dow will rally thousands of points more. Liquidity is strong and the cumulative advance-decline line supports the continuation of the rally. The trouble is it's sentiment driven and sentiment can turn on a dime, especially if you're the one feeling like the greater fool. Trade carefully here.

Good luck and I'll be back with you on Monday as Tom and I switch days next week.

Keene H. Little, CMT

New Option Plays

Not yet a Recovery

by Jim Brown

Click here to email Jim Brown

Editors Note:

Stocks get pummeled for a variety of reasons but the good ones recover. Costco is a category leader and is starting to recover from the Amazon generated decline.


COST - Costco - Company Profile

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

Costco shares were knocked for a $32 loss on the news that Amazon was buying Whole Foods. There was panic that Amazon was getting into the grocery business and would decimate the sector. Nothing could be further from the truth. Even if it was it would cause the most trouble for chains like Kroger, Safeway, Sprouts Farmers Market, etc.

If the acquisition goes through, and there is growing doubt, I do not foresee Whole Foods selling big screen TVs, winter parkas, cameras, caskets, cruises or ketchup and toilet paper by the case. The two stores are not compatible.

Furthermore, 45% of Costco members are already Amazon Prime members we as well based on a Morgan Stanley survey. Members of both services are looking for deals.

Costco makes the majority of its money from memberships (75%) and very little margin on its products. Amazon and Whole Foods are not going to undercut Costco on prices. Costco had 48.3 million members at the end of last quarter, up from 47.9 million. There were 37.4 Gold Star members and 18.3 million executive memberships. Total cardholders rose from 88.1 million to 88.9 million. Whole Foods has 350 stores and only about 12 million estimated repeat shoppers.

Did you know that Costco sells its products on Amazon. Costco's private label brand, "Kirkland" makes up about 20% of Costco's sales in the stores and those same products are available on Amazon. Actually, sales of the Kirkland products on Amazon are higher than in the stores.

Earnings August 24th.

Costco shares are starting to recover from the decline. Shares appear to have bottomed at support at $1.50. I expect them to rise as we get closer to earnings. Any remaining shorts will not want to hold over an earnings report that is likely to be strong. It the market decides to weaken in August, Costco is insurance since it has already sold off. Investors will be looking to buy the beaten down stocks as a safety play.

Buy Sept $155 Call, currently $2.51, Initial stop loss $149.


SPY - S&P-500 ETF (Updated) - ETF Profile

• The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index (the "Index") The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors.

The S&P is marching slowly towards a date with destiny and 2,500. Since the median estimate by the top 16 analysts was a 2,450 yearend price target on the S&P, the arrival at 2,500 could be a tripwire that triggers an August correction. We have not had a 5% drop in a year and it has been 9 months since a 3.5% decline. With earnings rapidly playing out and most of the high profile companies will finish reporting by next Wednesday, I am going to recommend a bearish position for August/September.

I am going to set an entry trigger for a SPY put with the S&P at 2,495. Since aggressive traders normally want to anticipate a particular number, I want to enter the position just before we reach that level.

Update 7/26/17: The Dow was up +100 points, Nasdaq +10, Nasdaq 100 +20 and the S&P only gained 70 cents. The Russell 2000 lost -6 and the S&P-400 lost -15. We may not get to that 2,495 level. I am going to add another trigger/strike in case we get a failure from this level.

Only enter one strike. If one trigger is hit the other is cancelled.

Upside entry trigger: With a S&P trade at 2,495:

Buy Oct $245 put, estimated premium $3.00, initial stop loss $2,510.

Downside entry trigger: With a S&P trade at 2,465:

Buy Oct $243 put, estimated premium $3.00, initial stop loss $2,485.

In Play Updates and Reviews

Not a Good Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

It would appear on the surface with the Dow up +97 and the Nasdaq indexes both positive, this was a good day but that is not the case. The S&P gained only 7 tenths of a point and the Russell indexes were all negative. The S&P-400 lost 15 points and the Russell 2000 -6 points.

The S&P is the market barometer. The Dow only gained 97 points because Boeing spiked 20 points to add 140 Dow points. Without Boeing the Dow would he been well into negative territory.

This is not a good sign when the broad market is weak in the middle of the heaviest earnings week of the Q2 cycle. I have revised the SPY put recommendation from yesterday to include a downside entry trigger as well.

Facebook beat on earnings and rose $7 in afterhours. Paypal beat but only gained $1. That is not likely to set the Nasdaq on fire for Thursday but it is possible.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

SPY - S&P-500 ETF
The long put remains unopened until triggered.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

ADSK - Autodesk Inc - Company Profile


No specific news. Shares gained another $1.62 in a bullish market.

Original Trade Description: July 24th.

Autodesk, Inc. operates as a design software and services company worldwide. The company's Architecture, Engineering and Construction segment offers Autodesk Building Design Suites to manage various phases of design and construction; Autodesk Revit products that offer model-based design and documentation systems; Autodesk Infrastructure Design Suites; AutoCAD Civil 3D, a surveying, design, analysis, and documentation solution; and AutoCAD Map 3D software for infrastructure planning, design, and management. Its Platform Solutions and Emerging Business segment offers AutoCAD software, a professional design, drafting, detailing, and visualization software; and AutoCAD LT, a professional drafting and detailing software. The company's Manufacturing segment provides Autodesk Product Design Suites for digital prototyping; Autodesk Inventor to go beyond 3D design to digital prototyping; AutoCAD Mechanical software to accelerate the mechanical design process; Autodesk Moldflow, an injection molding simulation software; Autodesk Delcam, a CAD and computer-aided manufacturing software; Autodesk PLM 360, a product lifecycle management application; and Autodesk Fusion 360, a product development environment. Its Media and Entertainment segment offers Autodesk Maya and Autodesk 3ds Max software products that offer 3D modeling, animation, effects, rendering, and compositing solutions; and Autodesk Flame and Autodesk Lustre software applications that offer editing, finishing, and visual effects design and color grading solutions. Autodesk, Inc. sells consumer products for digital art, personal design and creativity, and home design in digital storefronts and over the Internet. It licenses or sells its products to customers in the architecture, engineering, and construction; manufacturing; and digital media, consumer, and entertainment industries directly, as well as through resellers and distributors. Company description from FinViz.com.

For Q1, Autodesk (ADSK) reported a loss of 28 cents that beat estimates for a loss of 33 cents. Revenue of $478.8 million beat estimates for $474.1 million. The company is losing money because they are converting from a software sales model to a subscription model and that always causes a short fall in the first 12-24 months of the process but results in larger profits in the future. New subscriptions rose 26% to 1.09 million, up 227,000 from the same period in 2015.

The company guided for the current quarter for a loss of 21-27 cents on revenue of $460-$480 million. Analysts were expecting $503 million and a 13-cent loss. Shares declined $2 on the news.

The CEO said today the global building boom is a big boost for Autodesk revenue. You have to have a program to build a building today and that program has to be linked to dozens or even hundreds of smartphones. All of that is a positive for Autodesk.

Earnings Aug 17th.

The stock spiked to $114.50 on the earnings in May and then faded on consolidation until the Nasdaq flash crash the prior week. Being a tech stock it imploded with the rest of the tech sector. The rebound followed the pattern of the rest of the large cap tech stocks. A couple days higher and then a retest of the decline. Shares rebounded from the early July lows and are moving back towards the May high at $114. Monday's close was a 6-week high.

This is a short term position since ADSK reports earnings on August 17th and the option expires on the 18th. We will decide the day before earnings if we want to hold over the report. Normally we do not. I would like to see a gain of a couple bucks in the premium and a quick exit before the report.

Position 7/25/17:

Long Aug $115 call @ $2.30, see portfolio graphic for stop loss.

AMAT - Applied Materials - Company Profile


No specific news. Shares rebounded sharply after the AMD/TXN earnings. Now at new high resistance.

Original Trade Description: July 17th.

Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, display, and related industries worldwide. It operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The Semiconductor Systems segment develops, manufactures, and sells a range of manufacturing equipment used to fabricate semiconductor chips or integrated circuits. It offers products and technologies for transistor and interconnect fabrication, including epitaxy, ion implantation, oxidation and nitridation, rapid thermal processing, chemical vapor deposition, physical vapor deposition, chemical mechanical planarization, and electrochemical deposition; patterning, selective removal, and packaging products and systems that enable the transfer of patterns onto device structures; and metrology, inspection, and review systems for front- and back-end-of-line applications. The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment, and factory automation software for semiconductor, display, and other products. The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays, organic light-emitting diodes, and other display technologies for TVs, personal computers, tablets, smart phones, and other consumer-oriented devices, as well as equipment for flexible substrates. The company serves manufacturers of semiconductor wafers and chips, liquid crystal and other displays, and other electronic devices. Applied Materials, Inc. was founded in 1967 Company description from FinViz.com

Estimated earnings date August 17th.

AMAT is an old chip company founded in 1967. In chip terms this company is an antique. However, they are growing by focusing on new products rather than fight it out for low margin chip products everyone else is making. One of their focus products is OLED screens. The adoption rates for OLED screens means strong demand for chips to power those screens. By 2021 more than two-thirds of smart phones could have OLED screens. AMAT is shooting for 30% to 40% of the total addressable market two years from now. They currently have 15% share. They have grown their display revenue by 20% annually for the last five years.

The company said the demand for memory, which is currently off the charts, is just getting started. The coming of big data, IoT, streaming video and massive data storage requirements has caused a surge in demand that is just the tip of the coming iceberg. AMAT grew its memory revenue to 35% of the total in the last quarter. Manufacturers are raising prices by about 15% per quarter because of the shortages and there is no end in sight.

The upgraded analyst price targets after the big semiconductor show last week is now $65 on the high side and $55 on the low end. AMAT closed at $46 today.

Position 7/18/17:

Long Aug $47 call @ $1.30, see portfolio graphic for stop loss.

BABA - Alibaba - Company Profile


Dan Loeb's Third Point fund added a large stake in Alibaba and spent a large portion of their recent investor letter explaining why Alibaba is such a strong investment. They did not disclose the size of their stake. Shares rallied over $3 to a new high on the news.

Original Trade Description: June 10th.

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party platform for brands and retailers; Juhuasuan, a sales and marketing platform for flash sales; Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer marketplace. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time bidding online marketing exchange in China; and data management platform through TANX for marketers to execute their campaigns with proprietary and tailored data. In addition, it offers cloud computing services, including elastic computing, database, storage and content delivery network, large scale computing, security, and management and application services through its Alibaba Cloud Computing platform; Web hosting and domain name registration services; payment and escrow services; and develops and operates mobile Web browsers. The company provides its solutions primarily for businesses. Company description from FinViz.com

Alibaba is the poor investor's Amazon. With shares at $135, the options are at least reasonable but not cheap. Alibaba is growing as fast or faster than Amazon and tries to copy everything Amazon does.

When the company reported earnings for the last quarter at 63 cents, they missed estimates for 68 cents. Revenue of $5.6 billion easily beat estimates for $5.2 billion. Other than the earnings miss it was a solid quarter with ecommerce up 47% and cloud computing up 102%. Digital media growth was up 234%. Mobile MAUs rose from 493 to 507 million. That is important because 90% of China's ecommerce occurs on a mobile device.

The company announced plans to buy back $6 billion in stock over a two-year period.

Earnings August 18th.

Shares dipped on the earnings miss then spiked on the guidance to $125.50, which was a new high. After a little more than two weeks of post earnings consolidation, shares returned to that $125.50 level and closed at a new high.

There was an analyst day last week and that kicked the stock up to another level with a $10 gain. The company guided for 45% to 49% revenue growth in this year and analysts were only expecting 37%. MKM partners raised the price target to $177. Pacific Crest raised their price target to $160 from $137. Needham raised their target to $155. The Benchmark Company is targeting $175.

Shares declined on Tuesday on no news. With the stock overbought after the analyst meeting we could be seeing some simple profit taking. I am going to put an entry trigger on the position. If shares continue lower I will revise the entry.

Update 6/20/17: Alibaba is hosting a forum for 3,000 entrepreneurs in Detroit to explain how easy it is for them to begin selling products on Alibaba's websites. CEO Jack Ma said in another interview he expects to employ 1 million workers in the USA.

Update 6/27/17: JP Morgan initiated coverage with an overweight rating and $190 price target. Barclays said it valued Alibaba in a sum of the parts method at $200 but their price target for the parent is $175 with an overweight rating.

Update 6/29/17: Mott Capital said Alibaba could be worth $210 on a fundamental basis. A "source" in China said Alibaba will launch a device similar to Amazon's Echo but Chinese speaking, next week. That should give the stock a decent pop.

Update 7/5/17: Alibaba announced the Alexa clone called Genie X1, which will be available to the first 1,000 people for a one-month trial. The cost will be $73 during this live test and it only speaks mandarin.

Update 7/10/17: RBC analyst Mark Mahaney raised his price target on BABA from $140 to $160 and reiterated an outperform rating saying fundamental trends remain impressive. Alibaba said recently it is targeting $1 trillion in gross merchandise volume in 2020. Alibaba's Singles Day promotion is 40 times larger in sales than Amazon's Prime Day, which starts tonight.

Position 6/19/17 with a BABA trade at $139.50

Long Aug $145 call @ $5.95, see portfolio graphic for stop loss.
Short Aug $155 call @ $2.92, see portfolio graphic for stop loss.
Net debit $3.03.

THO - Thor Industries - Company Profile


No specific news. I am surprised they did not rise more since they are Dow reactive and the Dow was up 100 points.

Original Trade Description: July 15th.

Thor Industries, Inc., through its subsidiaries, designs, manufactures, and sells recreational vehicles, and related parts and accessories primarily in the United States and Canada. It operates through Towable Recreational Vehicles and Motorized Recreational Vehicles segments. The company offers travel trailers under the Airstream International, Classic Limited, Sport, Flying Cloud, Land Yacht, and Eddie Bauer trade names, as well as Interstate and Autobahn Class B motorhomes; gasoline and diesel Class A and Class C motorhomes under the Four Winds, Hurricane, Chateau, Challenger, Tuscany, Axis, Vegas, Palazzo, Synergy, Quantum, Compass, Gemini, A.C.E, Alante, Precept, Greyhawk, and Redhawk trade names; and fifth wheels under the Redwood and DRV Mobile Suites trade names. It also provides conventional travel trailers and fifth wheels under the Montana, Springdale, Hideout, Sprinter, Outback, Laredo, Alpine, Bullet, Fuzion, Raptor, Passport, Cougar, Coleman, Kodiak, Aspen Trail, Voltage, Cameo, Cruiser, ReZerve, Sunset Trail, Zinger, Landmark, Bighorn, Sundance, Elkridge, Trail Runner, North Trail, Cyclone, Torque, Prowler, Wilderness, Shadow Cruiser, Fun Finder, Stryker, Sportsmen, Spree, Venom, Durango, SportTrek, Connect, Sportster, Sonic, Jay Flight, Jay Feather, Eagle, Pinnacle, Seismic, AR-One, Launch, Autumn Ridge, Travel Star, Highlander, Roamer, and Open Range trade names. In addition, the company offers equestrian recreational vehicle products with living quarters under the Premiere, Silverado, Ranger, Laredo, Trail Boss, and Trail Hand trade names; lightweight travel trailers and specialty products under the Camplite and Quicksilver trade names; and Class A motorhomes under the Insignia, Aspire, Anthem, and Cornerstone trade names, as well as provides aluminum extrusions and specialized component products. Company description from FinViz.com

In a weak economy, Thor is kicking butt. The company reported earnings of $2.11 which rose 41.6% compared to estimates for $1.87. Revenue of $2.02 billion rose 57% beat estimates for $1.96 billion. Operating cash flow rose 26.2% and gross profits rose 45.5%.

Sales of towable travel trailers rose 52.6% and sales of motorized RVs rose 78.7%. There was no bad news in the Thor report.

Estimated earnings date September 4th.

With the company posting record earnings the stock spiked from $94 to $104 on June 6th. When the market dipped, shares only pulled back to $102. In late June they rebounded to $110. During the market volatility over the last three weeks they dipped back to $102 and found support there once again. Now that the market has turned positive shares are rebounding.

I am using the September strike because of the September earnings date. We will exit well before then but that date will keep the premiums inflated.

Position 7/17/17:

Long Sept $110 call @ $3.00, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


The VIX opened at almost a record intraday low but rebounded in the afternoon when the S&P did not rally. In 2006 the VIX hit 8.60 intraday, which is currently the record.

The 9.60 closing low was the 10th consecutive day under 10. This is extremely abnormal.

Original Trade Description: July 12th.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss. Target $22 to exit.

BEARISH Play Updates (Alpha by Symbol)

HOG - Harley-Davidson - Company Profile


No specific news. Shares rebounded slightly from Tuesday's new 52-week low. The stock is refusing to decline under $48. Somebody has a large buy order at that level. I am tightening the stop loss.

Original Trade Description: July 24th.

Harley-Davidson, Inc. primarily manufactures and sells cruiser and touring motorcycles. The company operates through two segments, Motorcycles & Related Products, and Financial Services. The Motorcycles & Related Products segment designs, manufactures, and sells wholesale on-road Harley-Davidson motorcycles, as well as motorcycle parts, accessories, general merchandise, and related services. It offers motorcycle parts and accessories, such as replacement parts, and mechanical and cosmetic accessories; general merchandise, including MotorClothes apparel and riding gears; and various services to its independent dealers comprising motorcycle services, business management training programs, and customized dealer software packages. This segment also licenses the Harley-Davidson name and other trademarks. It sells its products to retail customers through a network of independent dealers, as well as ecommerce channels in the United States, Canada, Latin America, Europe, the Middle East, Africa, and the Asia-Pacific. The Financial Services segment provides wholesale and retail financing services; and insurance and insurance-related programs primarily to Harley-Davidson dealers and retail customers in the United States and Canada. This segment offers wholesale financial services, such as floorplan and open account financing of motorcycles, and motorcycle parts and accessories; and retail financing services, including installment lending for the purchase of new and used Harley-Davidson motorcycles. It also operates as an agent providing point-of-sale protection products, including motorcycle insurance, extended service contracts, credit protection, and motorcycle maintenance protection. Harley-Davidson, Inc. was founded in 1903 and is based in Milwaukee, Wisconsin. Company description from FinViz.com.

A week ago, they reported earnings of $1.48 compared to estimates for $1.38. Revenue of $1.77 billion also beat estimates for 1.59 billion. That was the good news. The bad news was a 6.7% drop in motorcycle sales, with a 9.3% decline in the USA. They warned they only expected to ship 241,000 to 249,000 for the full year, down 6% to 8% from 2016 .Prior guidance was for flat sales to 1% lower. For Q3 they only expect to ship 39,000 to 44,000 units, down 10% to 20% from Q3-2016.

Finding consumers who can afford a new bike and finding financing is getting tough. The major banks are pulling back from auto and motorcycle loans because of the rising defaults. The situation for Harley is not going to improve this year.

Expected earnings Oct 17th.

Friday's close was a 52-week low.

Position 7/24/17:

Long Nov $45 put @ $1.80, initial stop loss $50.65.

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